Overwhelming Majority See More Stimulus From Kuroda This Week

BOJ Policy: What Would Kuroda Do?
  • 78% of economists forecast BOJ will expand program on July 29
  • ETFs, negative rate most likely areas for change, survey shows

Haruhiko Kuroda hasn’t faced such intense expectations for more monetary stimulus anytime since his debut meeting as Bank of Japan governor in 2013.

Thirty-two of 41 analysts forecast that Kuroda and the BOJ board will expand their record program at the two-day meeting ending on July 29, according to a Bloomberg survey conducted July 15-22. That is the highest percentage of respondents in any poll since his first decision more than three years ago, when economists were unanimous in estimates that Kuroda would add to easing.

An increase in purchases of exchange-traded funds remains the most likely area for a boost, followed by a deeper cut in the negative interest rate applied to a portion of the money that commercial banks park at the BOJ, according to the survey. Just under half of the respondents said Kuroda would accelerate buying of government bonds, which is the mainstay of his efforts to drive inflation.

The rising expectations for action come as prices fall again in Japan while the economy looks to be slowing. Government data measuring core inflation has been flat or negative in Japan all year, and even using a gauge created by the BOJ itself, prices are rising at less than half the target of 2 percent.

Testing Time

“This meeting tests the seriousness of BOJ’s commitment to achieving the 2 percent price target,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. and a former BOJ official. “Further easing is likely to counter the argument that the BOJ is reaching the limit” of its policies. Kanno expects an increase of purchases of bonds and ETFs, as well as a bigger cut in the policy interest rate.

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It isn’t just economists who expect more stimulus from the central bank. The swaps market points to the overnight rate moving to minus 0.19 percent in three months, compared with minus 0.04 at the end of last week, indicating bets the BOJ will reduce the negative policy rate further.

However, Kuroda has both surprised and disappointed markets before. In April, when 56 percent of analysts forecast action, there was nothing. Yet nobody forecast the BOJ would introduce a negative rate in January, and in October 2014, only 3 people anticipated that Kuroda would add to its asset purchases.

Outlook Report

The central bank will also release its outlook for prices at the end of meeting, with many expecting downward revisions. Only one of 38 economists forecasts the BOJ to achieve its inflation target during the year ending in March 2018.

Prime Minister Shinzo Abe’s government plans an extra budget and this has spurred speculation there may be coordinated action with the BOJ, although Kuroda has repeatedly ruled out any so-called "helicopter money." Some economists, including Takeshi Minami, said this meeting provides a good opportunity to add stimulus to show the central bank is cooperating with the government.

“I expect the BOJ will step up qualitative and quantitative easing to show unity with the government,” said Minami, chief economist at Norinchukin Research Institute. “No action would create disappointment and demand from the market for more easing in September.”

After repeatedly postponing its forecast for when it expects to reach the price target, some economists aren’t sure if another delay would prompt further policy action. The BOJ has pushed back its forecast multiple times without taking action.

“The delay itself won’t necessarily require more expansive policy,” said Takuji Okubo, chief economist at Japan Macro Advisors. “The BOJ will save its ammunition for further stimulus to prepare for when an abrupt deflationary shock hits the economy.”

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